The real estate transactions that are exempt from VAT in the UAE and how VAT registration UAE can help you in filing your VAT returns for the real estate transactions will be discussed in this article. Having vast knowledge in the field of accounting and taxation, our tax consultants can help you in filing your VAT returns for your real estate property be it commercial or residential.
Defining real estate transactions and supply of real estate
The real estate transactions here also refer to the real estate property as well as the real supply of real estate. Real estate includes the properties that consist of land or buildings and any area of land on which rights, interest, or services can be created, any building or a structure that is permanently attached to the land and any fixture or equipment that is permanently attached to the building, structure or engineering work that is permanently attached to the land.
The supply of real estate on the other hand means the process by which the ownership of the real estate, or right to use the real estate is given to another person.
The VAT laws classify the supplies of real estate into the following categories:
- Exempt- these are the real estate properties that are exempt from VAT. New residential properties and subsequent supply of charitable buildings come under this category.
- Zero-rated- these are the real estate properties or supplies for which VAT is applicable at 0%. New residential property and the first supply of a charitable building come under this category.
- Standard rated- the standard rates real estate properties or supplies are the ones on which the standard 5% VAT rate is applicable. Commercial buildings and subsequent supply for a charitable building are 5% taxable under VAT.
- Out of scope- these are the real estate properties or real estate supplies that are kept out of the purview of VAT. A property located within a designated zone is out of scope from a VAT perspective.
The FTA rates residential units and bare land as exempt from VAT and the commercial units are charged at the standard 5% VAT.
What are real estate properties as per FTA?
First of all, here it is important to define what residential property is? Without having any clarity on what kind of property it is we cannot be sure whether VAT is to be paid on that property or not. The authorities have made a clear demarcation between commercial and residential property. According to the Federal Tax Authority, the following properties have been included in the residential property:
- Villas, townhouses, and apartments that are not serviced on a regular basis.
- Housing that is occupied by the laborers and students.
- The accommodations that have been provided to police officers and other armed forces.
- Lastly, the nursing homes, orphanages, and rest houses.
VAT exemption rules for real estate properties
The VAT calculation for the sale and lease of residential buildings is very simple. They are either exempt or are zero-rated. When a property is exempt, the same is not mentioned in the invoice whereas, when a property is zero-rated, the landlord has to charge 0% VAT and it has to be reflected in the invoice.
According to the FTA law, whether a property is zero-rated or exempt depends on the time of supply. If the property is new, the charge will be 0% on the first supply of the property within the first 3 years of its completion. Once it’s completed, the residential property becomes tax-exempt.
What are commercial properties as per FTA?
Now let us understand what commercial property means? Similar to the definition of residential property, the Federal Tax authority defines the commercial property. According to the definition, the following units are considered commercial properties.
- Serviced apartment or hotel apartments
- Small and big shops
- Buildings used for healthcare like clinics and hospitals
- Educational institutions like schools and colleges
- Short term leases that are shorter than 6 months
VAT rules for real estate properties
As per the guidelines issued by the FTA, all commercial properties whether they have been leased or sold out, are subject to a VAT at the rate of 5%. This means that the properties that are used for office or retail purposes are supposed to come under the standard VAT rate. Even the car parking, if it is not for residential property, is subject to the standard VAT rates. Hotels and serviced apartments are also considered commercial properties and are subject to standard VAT rates.
VAT recovery rules for a real estate owner?
An owner of a real estate building in the UAE will be able to recover the expenses that are related to the first supply of the building, only if it is supplied within the first 3 years of its completion as for the first 3 years the supply for residential buildings is zero-rated. For subsequent years, the owner will not be able to recover the VAT as it becomes an exempt supply.
In the case of commercial buildings, the owner will generally be able to recover the VAT in respect to the expenses paid related to the supply of the building as it becomes a taxable supply.
How is a mixed building treated to VAT?
In the case of a mixed building, the rent or sale of the residential part of the building will be either zero-rated or exempt depending upon the time of supply. On the other hand, the rent or sale of the commercial part of the building will be treated as subject to 5% VAT. the expenses incurred by the owner of the building can be recovered in case the supply is taxable and can be apportioned if the supply is under exempt category.
Do the owners of real estate need to do VAT registration?
The owners of the real estate buildings do not need to register for VAT if they do not hold any other business in the country. The owner of any building that is not residential will need to register for VAT in case his preceding 12 months supplies exceed AED 375,000 by the end of the coming 30 days.
Will VAT be charged to the tenants of the residential units?
The VAT for the rent of residential buildings is exempt. The rent of commercial buildings will be subject to 5% VAT.
How to apply for VAT registration or deregistration through VAT registration UAE?
The decision for VAT exemptions for the real estate transaction in Dubai is in the hands of the Federal Tax Authority. They may approve or reject your registration applications. Therefore, if you need the right assistance for getting your VAT applications to be through, do get in touch with VAT Registrations UAE as we may help you in getting it done smoothly. We will not only guide you in getting your business registered for VAT, but our regulated tax agents will also help you in the procedure of canceling the VAT or the VAT deregistration process as well. Call us today.